Even when it looks impossible there are options
I recently watched a presentation by the major Mortgage Insurer, Genworth on their Homeowner Assistance Program and for once I am impressed that here is a stakeholder who is offering some very worthwhile options to people suffering mortgage stress. The message is that there are options, some potentially very good options and bankruptcy or “debt agreements” are not necessarily the only option for you – so give the black dog a kick in the backside and give us a call to discuss your situation- our service is free and completely confidential.
Hopefully you aren’t at the critical stage but it is important that if possible act before you miss a repayment
One of the first things a lender checks when considering a home loan refinance application is your past repayment performance and they do this by checking your home loan and credit card statements, typically for the last 6 months. They are looking for signs that you are not coping as after all they don’t really want to take on someone else’s risk. A missed payment on your credit card looks bad but can often be explained however a missed payment on your mortgage looks very bad while 2 missed payments is fatal. By this stage you have virtually no option but to try and renegotiate some sort of payment relief with your existing lender… in these circumstances you have very little bargaining power and have to rely largely on their good will.
I have plenty of equity, what’s the problem?
Usually there are lots of options however one of the most common misconceptions we hear is “I have plenty of equity in my home so I should have no problem finding a lender to refinance me” …. quite simply WRONG. Whilst having good equity is good and may give a lender more latitude, the days of lending based on the strength of the security (asset lend) are gone. The 2009 NCCP Act put an end to this entirely. Therefore all of the traditional peudential requirements apply ie: income, employment and expenditure.
What if it’s not too late?
People experience mortgage stress due to many reasons such as retrenchment, reduction in income, illness, business failure or simply biting off more than they can chew … bad budgeting. You might think that your only option is to find a lower interest rate and while this may help it may not be the only or the best solution.
If you have had your mortgage for over 5 years then a simple refinance to a new loan term can offer immediate help. Let’s use an example of a $250,000 mortgage with 22 years to run at an interest rate of say 5.50 percent, your repayments will be $1634 per month. By simply refinancing the same amount at the same interest rate to 30 years the repayments fall to $1420 per month – a reduction in repayments of $49 per week.
Now let’s make that same loan interest only and now your repayments fall to $1145 per month a reduction in repayments of $112 per week over your original position. Remember you are not saving money – in fact you will be paying more in the long run but you are taking some of the pressure off in the hope that things will improve in the future.
My income has fallen what are my options?
The options above still apply but if your income has fallen then you may struggle to demonstrate that you can afford the new loan repayments. This is because lenders don’t use the immediate benefit of ‘interest only’ they have to use P&I when calculating. What’s more lenders use an artificially high interest rate when calculating your ability to service the debt – in case of interest rate increases in future. This ‘servicing rate’ can be 2.5 percent higher than the actual rate you will be paying. However there are some (not many) lenders who will use a much lower interest rate if you agree to a fixed interest rate home loan and strangely it may mean you are paying a higher interest rate but you can borrow more. Of course we would only suggest this outcome once we had exhausted all of the lower cost option.
Get advice before things get out of hand and while you still have some room to move. Don’t just jump at the first low interest rate offer you can find as there may be much better outcome for both the short term and the long term. Don’t talk to your bank until you have spoken to your mortgage broker there is no point alerting them to your difficulty until you are sure as to what other options you have. We will be considering your current lenders products and options – and their prior performance as well as other lenders.
If worse comes to worse then you may need to sell the property, it is better if you list the property as a private sale than the bank lists it as a mortgagee in possession. Don’t rush into this, get legal advice and make sure that your broker has exhausted every other possibility.